December 06, 2015
A NYT article on cuts to government subsidies for solar and wind energy were put in place by a conservative government, “determined to tighten spending and balance the budget in a program to grow the economy.” The piece does not indicate how budget cuts in the current economic situation are supposed to “grow the economy.”
As the article points out, Denmark’s economy is suffering from a lack of demand.
“Shortly after taking over in June, the new government was forced to cut its forecast for economic growth to 1.5 percent this year and 1.9 percent in 2016, citing a slow recovery in domestic demand.”
Cutting spending on clean technologies means less demand, not more. This would mean that the government’s plans to reduce its subsidies are in direct conflict with its stated desire to increase growth.
While it is certainly the case that in some contexts lower government spending can lead to lower interest rates, which will spur consumption and investment (the Danish Kroner is tied to the euro, so interest rates have no effect on the exchange rate), this is hardly a plausible story in the case of Denmark. The interest rate on its 10-year government bonds is currently 0.91 percent. By comparison, the rate in the United States is 2.27 percent. In this context, it is unlikely that cuts to government spending can have much of a further effect in lower interest rates, nor that any further reduction in rates would have a noticeable effect on spending.
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